Davis Brown Immigration Law Blog

Tax Law Blog: The Impact of FATCA - December 31, 2013

The U.S. government loses an estimated $150 billion in revenue each year from offshore tax shelters. The Foreign Account Tax Compliance Act (FATCA), which became law in March 2010, is designed to prevent tax evasion by U.S. taxpayers with foreign accounts and has been projected to raise $7.6 billion in tax revenue over a 10-year period.

FATCA is wide-reaching and highly controversial. American Citizens Abroad (ACA), a well-established lobbying group representing the interests of Americans living overseas, opposes the legislation. ACA and other critics assert that FATCA is negatively impacting the U.S. economy, U.S. financial markets, American businesses operating abroad and American citizens who work and reside overseas. Reportedly, FATCA has led some banks to turn away U.S. clients in an attempt to avoid exposure to FATCA reporting requirements, withholding tax and potential penalties. There are also assertions that Americans living abroad are giving up their U.S. citizenship because of burdens created by FATCA.

Under FATCA, U.S. individual taxpayers must file an information return (Form 8938) with their annual tax returns for any year in which their interests in specified foreign assets exceeds the applicable reporting threshold. The new FATCA requirements apply in addition to FBAR reporting requirements (Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts).

Foreign financial institutions (FFIs) may register with the IRS and agree to report assets owned by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. FFIs that do not comply with FATCA will be subject to 30% withholding, beginning in 2014.

Final regulations issued by the U.S. Department of the Treasury and the IRS provided for a phased implementation of the FATCA requirements, beginning on January 1, 2014, and continuing through 2017. Given that the implementation of FATCA presents practical problems for U.S. withholding agents and FFIs, the timelines for implementing various provisions under FATCA have been delayed. Withholding agents generally will be required to begin withholding on payments made after June 30, 2014.

Proper compliance with FATCA means significant cost increases. As a result, some Americans who reside outside the United States are reporting banking lock-out. Rather than charging American customers higher fees to offset the new costs, some banks are deciding to shut down accounts held by U.S. clients. To implement FATCA, the United States has entered into Intergovernmental Agreements (IGAs) with a certain foreign governments. IGAs require all relevant FFIs in a jurisdiction to report information about offshore U.S. accounts. The IGAs include a non-discrimination clause to help prevent banking lock-out.

Additionally, critics of FATCA argue that growing numbers of U.S. expatriates are giving up their U.S. citizenship as a way of escaping the complications of the U.S. tax system and avoiding the new disclosure requirements. The number of Americans who renounced citizenship in 2013 rose significantly from previous years. The Time magazine article, "Mister Taxman: Why Some Americans Working Abroad Are Ditching Their Citizenships," reported a sevenfold increase in Americans renouncing U.S. citizenship between 2008 and 2011, attributed in part to FATCA.

The U.S. Department of the Treasury has dismissed this as a baseless claim. In a Treasury Notes blog entry from September 2013, Robert Black (Deputy Assistant Secretary for International Tax Affairs at the Treasury Department) stated, “FATCA provisions impose no new obligations on U.S. citizens living abroad.” Due diligence and reporting requirements fall on FFIs, and FATCA’s withholding obligations fall on institutions making payments to FFIs. U.S. taxpayers, including expatriates, are required to comply with U.S. tax laws. For federal income tax purposes, U.S. taxpayers are required to report and pay tax on their worldwide income, including reporting investment income earned on financial accounts located outside the United States. U.S. taxpayers must also disclose the existence of any foreign accounts on their U.S. tax return. Renouncing U.S. citizenship would not relieve those individuals of prior U.S. tax obligations. The full text of the blog entry can be accessed at this link: http://www.treasury.gov/connect/blog/pages/myth-vs-fatca.aspx.